NIVEL DE DAÑO PRODUCIDO A LOS ELEMENTOS SOCIOECONÓMICOS

Prior literature presented that public firms in various institutional characteristics have diverse financing decisions, since external environment is one of the most dominant factors to either encourage or constrain how firms choose their external financing sources. While external environment includes both country-specific factors and industry-specific factors, most of the existing empirical studies found a significant correlation between country- specific factors and the leverage ratio (Booth et al., 2001; Deesomsak et al., 2004; De Jong

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et al., 2008). Furthermore, after the financial crisis in 2008, the financial system as a whole as well as the external financial environment has been reformed and enforced with more policies and stricter legal regulations. Thus, institutional and country-specific determinants are also helpful to understand more thoroughly the issue of corporate finance behaviors, especially in the Nordic context as the scope of this paper.

While there is a significant amount of existing literature studying the impact of country-specific factors on leverage, the most commonly adopted country-factors include the development of the banking industry in relation to the financial market, GDP growth rate, the development of the stock market, the development of the bond market and inflation rate. Some prior empirical studies also included legal system variable by defining an indicator variable that takes a value of 1 if the country’s legal system is based on common law, and 0 otherwise (La Porta et al., 1998; Deesomsak et al., 2004; Fan et al., 2012). However, in this paper I do not adopt this variable into the regression model mainly because all four countries in the full sample set are using the same civil law system. Instead, five proxies are selected in the aspect of country-specific factors, including the development of the banking industry, the development of the stock market and the bond market, GDP growth rate and inflation rate. These variables are collected from the primary source which is World Development Indicators and Financial Structure Database of the World Bank.

Theoretically, different levels of the development of the banking industry may have impact on the accessibility to external financing, which helps to explain the difference in the level of leverage adopted by public firms in different countries. On the other hand, the development of the stock market may help to explain why public firms in one country prefer equity financing to debt financing than public firms in other countries. Inflation is another factor that may have impact on the choice of capital structure: from the lender’s perspective, high inflation discourages the lender to provide long-term debt as debt contracts are generally in nominal terms and high inflation makes the lender become worse-off. However, from the corporate’s perspective, the cost of debt is lowered in case of high inflation, thus the demand for corporate bonds increases in relation to the increase in inflation.

4.3.2.1 Development of the Banking Industry (BANK)

In this paper, development of the banking industry measures the size of the domestic banking industry and is defined as the ratio of demand, time and saving deposits in deposit money banks to GDP. The ratio is calculated as below.

𝐵𝑎𝑛𝑘 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 (𝐵𝐴𝑁𝐾) =𝐷𝑒𝑝𝑜𝑠𝑖𝑡 𝑀𝑜𝑛𝑒𝑦 𝐵𝑎𝑛𝑘𝑠

Theoretically, size of the banking industry may have impact on the choice of capital structure for public firms, as developed and mature banking industry could help these firms to get more accessibility to external financing, and thus encourage them to adopt a higher level of debt because of the lower cost of capital. Therefore, the development of the banking industry is expected to have a positive correlation with leverage. Existing literature also found a significant positive relationship between these two variables (Rajan and Zingales, 1995). However, the authors also noted that the relative importance of banking industry is less indicative of the difference in corporate leverage than in the relative amounts of private financing such as bank loans and arms-length financing through open market securities (Rajan and Zingales, 1995; Booth et al., 2001).

4.3.2.2 Development of the Stock Market (STOCK)

In this paper, development of the stock market is defined as the ratio of the stock market capitalization to GDP and is calculated as below.

𝑆𝑡𝑜𝑐𝑘 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 (𝑆𝑇𝑂𝐶𝐾) =𝑇𝑜𝑡𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑆𝑡𝑜𝑐𝑘 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝐺𝐷𝑃

Theoretically, between developed and developing markets, stock market in developed countries tends to be larger in trading volume with higher liquidity and smaller volatility than the stock market in developing countries. More importantly, during bearish period, developed stock market is probably more stable than emerging stock markets. Therefore, public firms listed in developed stock markets may prefer equity financing due to the transparent and developed stock market environment; thus, stock market development is expected to have a negative relationship with leverage ratio. In practice, prior studies also found a significant negative correlation between stock market development and leverage ratio (Booth et al., 2001).

4.3.2.3 Development of the Bond Market (BOND)

In this paper, development of the bond market is defined as the ratio of the total bond market capitalization to GDP, in which bond market capitalization is the sum of private and public bond market and is calculated below.

𝐵𝑜𝑛𝑑 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 (𝐵𝑂𝑁𝐷) =𝑃𝑢𝑏𝑙𝑖𝑐 𝐵𝑜𝑛𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 + 𝑃𝑟𝑖𝑣𝑎𝑡𝑒 𝐵𝑜𝑛𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝐺𝐷𝑃

Theoretically, developed bond market could facilitate issuing more trading bonds and thus, increase the leverage level of public firms. More interestingly, prior studies has found a counter-intuitive negative effect of the development of the bond market on leverage ratio (De Jong et al., 2008). It may be because a strong combination of various sources of

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financing, including both developed stock market and bond market, could provide a more efficient basis for public firms’ financing decision; and for public firms in a country with relatively weaker bond market, they are more likely to seek external financing from banks or from private sectors, instead of equity issues.

4.3.2.4 GDP Growth Rate (GDPGROWTH)

In this paper, GDP growth rate is defined as the annual real GDP growth rate in each country and is a common macroeconomic indicator for the overall economy performance in such country. The GDP growth rate is calculated as below.

𝐺𝐷𝑃 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 (𝐺𝐷𝑃𝐺𝑅𝑂𝑊𝑇𝐻) = % 𝑐ℎ𝑎𝑛𝑔𝑒 (𝐺𝐷𝑃)

In practice, prior empirical studies have found very mixed results for the correlation between the GDP growth rate and leverage ratio of public firms: Booth et al. (2001) found a positive relationship between the two variables in developing countries over the period from 1980 to 1990; on the other hand, Gajurel (2005) found a negative relationship between the GDP growth rate and debt ratio. One of the reasons for the mixed results in previous studies is that for public firms operating in high GDP growth rate markets, these firms have less incentives to adopt a large amount of external financing because the economy is already providing sufficient investment opportunities and therefore, they tend to adopt a lower level of leverage. On the other hand, the positive correlation between GDP growth rate and leverage ratio could be seen in competitive markets where concentration level is low. In this case, public firms may require more external financing for their operating activities to keep up to their competitors in a high growth environment.

4.3.2.5 Inflation Rate (INFLATION)

In prior studies, inflation rate is a common macroeconomic indicator to examine the impact of price level on debt and equity level of public firms. However, these studies have found mixed results for the relationship between inflation rate and leverage ratio. Theoretically, from the lender’s perspective, high inflation rate would discourage lenders to provide long- term debt to public firms as debt contracts are generally fixed in nominal terms and the high inflation rate would make these lenders become worse-off. However, from the borrower’s perspective, high inflation rate would lower the cost of debt for public firms, therefore, demand for corporate bonds is more likely to increase when inflation rate is high.

4.3.2.6 Country-specific Independent Variables Summary

Table 10 below provides a summary of the average value of country-specific factors across four Nordic countries. As it can be seen from the figures, across four Nordic countries, Sweden and Denmark have a more developed financial systems including banks, stock market and bond market, on the other hand, Finland has the least developed bond market among four countries.

Table 10: The Average Value of Country-specific Independent Variables across countries

Table 10 provides a summary of average value of different country-specifc factors across Denmark, Finland, Norway and Sweden in the period 2004 – 2017. Data is collected primarily from World Development Indicators and Financial Structure Database of the World Bank.

Country-specific Factors Denmark Finland Norway Sweden

Development of Banking Industry (BANK) 189.25% 87.80% 109.54% 125.33%

Development of Stock Market (STOCK) 63.78% 80.42% 55.59% 99.32%

Development of Bond Market (BOND) 201.46% 35.75% 46.65% 56.29%

GDP Growth Rate (GDPGROWTH) 1.16% 1.03% 1.65% 2.27%

Inflation (INFLATION) 1.57% 1.46% 1.94% 1.06%

Table 11 below provides a summary of the country-specific independent variables’ measurement, and their expected sign in relation to leverage ratio for public firms as discussed in the earlier sections.

Table 11: Summary of Country-specific Independent Variables

Table 11 provides a summary measurement of country-specific independent variables and their expected sign in relation to leverage. The set of country-specific independent variables consists of the development of the banking industry, the development of the stock market, the development of the bond market, GDP growth rate and inflation rate.

Country-specific factors Indicators Expected sign

Development of Banking Industry (BANK)

Deposit Money Bank Assets to GDP (%), measured as claims on domestic real

non-financial sector by deposit money banks as a share of GDP +

Development of Stock Market (STOCK)

Stock market capitalization to GDP (%), measured as the total value of listed

shares to GDP -

Development of Bond

Market (BOND) Sum of private bond market and public bond market capitalization to GDP +/- GDP Growth Rate

(GDPGROWTH) Annual real GDP growth rate +/- Inflation (INFLATION) Annual growth rate of the GDP implicit deflator shows the rate of price

change in the economy as a whole +/-